A

PROJECT REPORT
ON
“Bhel - Stock Market”

SUBMITTED TO: SUBMITTED BY:

AMITY SCHOOL OF BUSINESS

AMITY UNIVERSITY
NOIDA, G.B. NAGAR
(UTTAR PRADESH)
TABLE OF CONTENTS

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 COMPANY PROFILE
Bharat Heavy Electricals Limited (BHEL) is the largest engineering and
manufacturing enterprise in India in the energy-related and infrastructure sector which
includes Power, Railways, Telecom, Transmission and Distribution, Oil and Gas sectors
and many more. These sectors have been supplied with endless number of equipments
manufactured by BHEL. BHEL was established more than 50 years ago, ushering in the
indigenous Heavy Electrical Equipment industry in India. The company has been earning
profits continuously since 1971-72 and paying dividends since 1976-77.

BHEL manufactures over 180 products under 30 major product groups and caters to core
sectors of the Indian Economy viz., Power Generation & Transmission, Industry,
Transportation, Telecommunication, Renewable Energy, etc. The wide network of
BHEL's 14 manufacturing divisions, four Power Sector regional centres, over 100 project
sites, eight service centres and 18 regional offices, enables the Company to promptly
serve its customers and provide them with suitable products, systems and services --
efficiently and at competitive prices. The high level of quality & reliability of its products
is due to the emphasis on design, engineering and manufacturing to international
standards by acquiring and adapting some of the best technologies from leading
companies in the world, together with technologies developed in its own R&D centres.

As an engineering conglomerate, BHEL offers over a wide spectrum of products and

services for core sectors including power generation, transmission and distribution;
transportation; and oil and gas. as well as the supply of non-conventional energy systems.

Over 65 percent of power generated in India comes from BHEL-supplied equipment.

Overall it has installed power equipment for over 90,000 MW. The present chairman (as
of April 2008) of BHEL is Mr. K.Ravikumar.

Headquarters of BHEL is situated in New Delhi.

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ENVIRONMENT

BHEL’s financial position, products or services, business and marketing strategy,

employees and workers, skill of the people working in the company, etc. form the
internal environment of the company. Government policy, tax structure, interest
rate, competition, political climate, socio-economic scene, etc. are part of the
external environment. This is divided into two controllable environment and
uncontrollable environment - as a company as an entity or its management may
control most things within the organization, have a say in its overall development
but external forces are out of the company domain for control. Thus, these
external forces affecting the performance and profitability of the company need
analysis before taking any investment decision.

INDUSTRY
BHEL’s results:

Revenue: 18,702 cr. (up 29%)

Net Profit: 2,385 cr. (up 42%)
EPS: Rs. 97.4 (42%)

They want to target Rs. 44,000 cr. by 2011-12. That's five years away, and translates to
an average growth of about 20%.

Fabulous order book

BHEL has an order book of Rs. 54,000 cr.. This is expected to complete over the next
two and a half years. If we assume that will be evenly spread over, that means nearly
22,000 cr. will happen next year. That's already 20% higher than last year!

Any further orders will increase revenues. I believe revenues will grow at 30% as said in
the conference, and they'll continue to gain more orders for further years. Their current
net profit margins are around 12.75% which I believe they will maintain going forward,

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and if they do that their next year EPS will be around Rs. 135 per share. The one year
forward P/E for the current market price of Rs. 2,250 is about 16.7.

I believe this is phenomenally cheap for a company growing at 30% in a year and 20%
longer term.

Industry growth

But for this to sustain we have to be sure that this company has good long term growth
prospects. The power business, which is more than 70% of the total revenues, is
something the government is stressing on and there will be a massive growth in the
number of mega-power projects created. This will impact BHEL because it has always
been a primary provider to such projects, and has won orders consistently in spite of
competition from Chinese and Indian companies.

Interest rate hike effect

BHEL will be impacted by the recent increase in interest rates not directly - it has just
about 550 cr. in debt, and has nearly 4200 cr. in cash. It paid just 60 cr. in interest last
year, and it can wipe out debt quite easily without losing too much else. But its customers
may be debt driven, though most are government bodies. The interest rate increases will
not override the impetus on power, even at very high interest rates.

Bonus
BHEL has announced a 1:1 bonus, which will get confirmed in its EGM on April 30.
Bonus shares give no real added value and are typically used by people to make short
term capital losses - so prices are usually pushed up after a bonus announcement and
before the record date. This is entirely short term, and I would not recommend buying
shares purely for bonuses unless you want to offset capital gains.

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 ANNUAL REPORT & CHAIRMAIN’S SPEECH

“Bharat Heavy is clearly part of the equation to invest into India’s power sector, who
manages the equivalent of $1.2 billion of stocks across India, China, Russia and Brazil at
London-based BNP. “Over the long run, stocks like Bharat Heavy are outperformers.”
Bhel’s stock may climb to a record Rs2,946 in the next year, the average projection of 15
analysts surveyed by Bloomberg.
The stock has declined 27% on the Bombay Stock Exchange (BSE) this year, compared
with an 18% drop in the Sensex. Still, “buy” recommendations outnumber holds by 18 to
4. No analyst has a “sell” rating on the stock.
The shares rose 5.52% to close the day at Rs1,981.75 on BSE on Wednesday.
India, which produces 128,182MW of electricity, needs to generate about 13% more
power to meet current demand.
The government plans to add more than 76,000MW in the next five years and equipment
to produce three-fourths of that is already on order. Utilities will turn on about
10,000MW of capacity by next month.
“Bharat Heavy looks attractive from the growth perspective,” said Chairmen, whose $1
billion equity portfolio at Birla Sunlife Asset Management Co. Ltd in Mumbai includes
Bhel.
The capacity addition fattened the company’s order book, forcing some customers to wait
four years as it failed to expand its factories fast enough.
The Punjab State Electricity Board and other customers have levied penalties of as much
as Rs95 crore as compensation for project delays caused by late equipment deliveries.
Bhel is spending Rs3,200 crore to boost capacity by half, to 15,000MW, by 2009. The
expansion will add at least 25% to annual revenue, analysts said. The company may
double net income to Rs6,180 crore in the year ending 31 March 2010, on sales of
Rs38,400 crore, according to a Bloomberg survey of six analysts.

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YEAR AT A GLANCE

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8
 CURRENT BHEL MARKET

Market leader BHEL has charged the Chinese companies of grabbing the equipment
supply contract for mega power projects by resorting to dumping, but the state-owned
undertaking refused to move government on this.

BHEL lost out on contracts for the two ultra mega power projects to Chinese companies
as the Chinese currency yuan is under-valued.

BHEL equipment were much better than the competitors and referred to independent to
establish that the plant load factor of its projects was 90%, while it was 60% in the case
of Chinese equipment.

BHEL`s upcoming joint venture with NTPC, which is likely to be incorporated by first
week of April, would also help it in maintaining its market share.

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CONTRACTS & ITS EFFECTS

Bharat Heavy Electricals bagged its first commercial order for 660 MW Steam Turbine
Generators with supercritical parameters against international competitive bidding. The contract
is valued at Rs.1474 crore and is awarded to BHEL by NTPC for setting up 2X660 MW steam
turbine generator package at Barh Thermal power project stage-II , located about 75 km from
Patna in Bihar.

FINANCIAL HIGHLIGHTS

During the year the turnover increased by 14.2% to Rs. 21401 crore from Rs. 18739
crore in the previous year. Profit after tax registered an increase of 18.4% to Rs. 2859
crore as against Rs. 2415 crore in the previous year. The increase in profit is driven by
the higher volume of operations and enhanced interest income. Net worth of the company
has gone up from Rs. 8788 crore in 2006-07 to Rs. 10774 crore in 2007-08 registering an
increase of 22.6%. NAV per share, based on enhanced share capital, has increased from
Rs. 179.5 in 2006-07 to Rs. 220.1 in 2007-08.

The company has paid interim dividend of 90%, Rs. 440 crore, on share capital of Rs.
490 crore during the year 2007-08. The Board has also recommended a final dividend of
62.5% i.e. Rs.306 crore. The total dividend payment for the year 2007-08 is Rs. 746 crore
(exclusive of dividend tax) as against Rs. 600 crore in the previous year. Provision of Rs.
52 crore has been made for corporate dividend tax on the final dividend proposed.
Corporate dividend tax of Rs. 75 crore has already been paid on the interim dividend.

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 RESULT

LONG TERM VALUE

I think BHEL is a good stock to hold for five years, especially if their margins improve.
If they are able to move to 15% margins by 2012, we should have an EPS of about 286,
which, at a P/E of 20 translates to about Rs. 5720 per share. (After the bonus we must
divide all numbers by 1/2) That's about a 20% annualised return over five years.

FOR THE CURRENT

Presently the stock is trading weak at Rs 2,017 after opening at Rs 2,092 on the Bombay
Stock Exchange (BSE).

In my view, according the current market, if the stock fell below Rs 1,980, it may see
more weakness. So the investors must sell the stock below Rs 2009 with a stop loss of Rs
2060, for targets of Rs 1937-1911.

After selling the stock in today’s session, the interested investors can enter the stock
again, but only on declines.

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